The wild scene in midtown Manhattan last Monday when the company held its roadshow was a testament to Facebook fever. More than 500 institutional investors waited a half-hour or more to get into a hotel ballroom for a thin presentation that included a stale 30-minute video that already was on the Facebook site, and the man everyone came to see, CEO Mark Zuckerberg, offered few comments and little of substance.

Still, the buzz is that Facebook is a must-own, or certainly must-look-at, for growth-stock managers because of its lofty market value and its immense potential, given a user base of 901 million, or 58% of the globe's Internet users (not including China, where the site is restricted).

If the deal is priced at $35, Facebook will be valued at around 70 times projected 2012 earnings of 50 cents a share and 18 times estimated revenue of $5 billion.

In contrast, Google, at $610, trades for less than 15 times 2012 profit estimates and under six times revenue. At $570, Apple shares have a 2012 P/E of just 12 and the company's sales have been growing more rapidly than Facebook's despite a revenue base that is 40 times larger. The effective P/Es on Google and Apple are even lower when factoring in their huge cash hoards. Facebook also will have plenty of cash—an estimated $9 billion—after its IPO.

Facebook shares traded higher than $35 in the private market in late March, hitting $44 on SharesPost. That suggests that they may be priced at a "discount," to produce a pop on the first day of trading. But the more widespread trading of pre-IPO shares on private markets has ultimately made deal pricing more efficient. The stock may be in the high $30s after the dust clears.

THE BIGGEST CHALLENGE for Facebook is to find ways to monetize the growing number of users who access the site on mobile devices. Smartphone screens don't lend themselves well to advertising. This is no small problem. A comScore report last week showed that U.S. Facebook users spent more time on the site in March using mobile devices than they did using PCs.

Tale of the Tape

Google was more attractively priced than Facebook at the time of its 2004 IPO.

Facebook vs. Google at IPO

Mkt

Rev

Rev

P/E

No. of

Val (bil)

(bil)

Chg*

Ratio

Employees

Facebook

$95

$5.2

40%

69

3,539

Google

25

3.2

117

42

2,292

Google IPO in Aug. 2004. Revenue growth first year public.

Source: Company reports

In addition, Facebook's revenue growth is slowing, with first-quarter sales of $1.06 billion actually coming in below the $1.13 billion in the fourth quarter. Facebook warned about the mobile-device issue in an updated securities filing last week, noting "we do not currently directly generate any meaningful revenue from the use of Facebook mobile products, and our ability to do so successfully is unproven." Facebook's mobile weakness could have driven its $1 billion recent deal to buy Instagram, which has a popular application that allows smartphone users to swap photos. But Instagram has no revenue.

Many investors are comparing Facebook's IPO to Google's in August 2004. The Google deal was a big score for original investors because the shares, priced at $85, immediately traded above $100 and topped $400 in little more than a year, driven by profits that more than doubled in 2005—and would nearly double again in 2006.

The key differences are that Google's IPO was more cheaply priced, relative to earnings and revenue, than Facebook's almost certainly will be. And revenue growth, at 45% in the first quarter, year over year, is less than half of what Google had in the quarter before it went public.

"Facebook is one of the greatest companies of our time, but it doesn't necessarily mean that it will be one of the greatest stocks," says Dan Niles, senior portfolio manager at AlphaOne Capital Partners in Tiburon, Calif.

Google's IPO was relatively small at under $2 billion, and the deal conferred a market value of $25 billion. With some 2.7 billion fully diluted outstanding shares, including employees' restricted stock and options, Facebook's value will be four times that.

THE IPO'S TIMING probably is good for Facebook. As one investor told Barron's, the shares might have been crunched if Facebook had been public last month, when it announced first-quarter results showing a sequential quarterly drop in revenue. That's not something that growth investors in richly priced stocks like to see.

And by going public now, rather than later this year, existing holders of a massive amount of Facebook stock will get the opportunity to sell before a potential rise in capital gains taxes in 2013. When companies go public, large amounts of privately held stock often become available for sale six months after the IPO. That's the case with Facebook, as some 1.8 billion shares will be freed from lock-up restrictions between August and November of this year. Existing holders, including employees and venture-capital companies, have huge gains since they paid an average of just $1 a share.

Investors also have to contend with Facebook's stated goal of putting user experience ahead of short-term profits. Zuckerberg has made that point clear, and he will call all the major shots because of his complete control. Zuckerberg will own 503 million shares after the IPO. His holding of super-voting stock with 10 votes, compared with one vote for public shares, will give him 32% voting control. Factor in his voting proxy for another 466 million shares and the 28-year-old entrepreneur will control 61% of the votes.

"I like Zuckerberg. He's not full of himself like some other tech CEOs, and he's not distracted by wealth. I don't think he will be ordering a 757 for himself," says Fred Hickey, the editor of the High-Tech Strategist newsletter and a member of the Barron's Roundtable. Google co-founders Sergey Brin and Larry Page caused a stir when they bought a Boeing 757 in 2007, the year that incidentally marked the peak for Google shares. Hickey says the Facebook platform "is really good. The question is whether this focused and bright guy can monetize it."

THE BULL CASE ASSUMES Facebook will find a way to monetize its enormous and engaged user base of over 900 million with various forms of advertising and other services. In an April report, Bernstein analyst Carlos Kirjner noted that Facebook generated $3.2 billion of ad revenue last year, less than 10% of all Internet display advertising. This suggests an opportunity for Facebook to capture a greater share of a growing pie as advertisers continue to move spending away from traditional media.

"The investment thesis is pretty simple. Facebook knows more things about more people than does Google, and those people have stronger emotional connections and loyalty because that's where their friends are," says Kevin Landis, chief investment officer at Firsthand Capital, a Facebook holder. "So given a few years to figure it out, Facebook could end up being worth more than Google, which has a market value of $200 billion."

Facebook likely will end up in the benchmark S&P 500 index. How soon? Google entered the S&P in 2006, some 19 months after its IPO. The key requirement for Facebook to meet is based on the public float in its shares, which S&P needs to see above 50%. After the IPO, the Facebook float is expected to be about 15%. That figure will rise as lockup restrictions are lifted in the next six months.

Several analysts came out with bullish reports on Facebook last week, with target prices as high as $44. Kirjner's April report didn't have any specific price target or profit estimates, but he figured the core business was worth $60 billion to $100 billion, with another $50 billion for potential future opportunities stemming from what he calls its "rich data set and the engagement of its nearly one billion users." This could involve electronic payments, banking, credit, games, and entertainment, he wrote.

The Bottom Line

Investors hoping for runaway gains from Facebook could be sorely disappointed. Earnings must grow six-fold, to $3 a share, to support a double from the stock's likely $35 IPO price.

Among the many Facebook-targeted ad opportunities is its ability to connect an advertiser with the nearly 100,000 women in the New York City area who are engaged to be married, or the 36,000 single men aged 18 to 35 nationally who have indicated that they like skydiving, says Bernstein's Kirjner.

This kind of precise targeting—enabled by user-generated information—represents one of the most powerful arguments for Facebook, yet some ad buyers have expressed disappointment with Facebook campaigns, and the company faces the challenge of not alienating users by bombarding them with ads. Kirjner last week put out a research note spelling out some important questions for management. The first was: "Why haven't advertisers shifted more of their budgets to Facebook faster?"

ZUCKERBERG HAS CREATED an incredible company in less than a decade, but great businesses aren't always great stocks if pricing is too high. "To make it a great investment, a lot of things have to break investors' way," says Steve Weinstein, senior Internet analyst at ITG Investment Research in San Francisco.

At $35, Facebook shares could already be discounting $15 billion in annual ad revenues in a few years and $1.50 to $2 a share in profits. A doubling in Facebook's market value may require $30 billion or more of revenue by 2017, five to six times what the company is expected to generate this year. Those revenues could produce $3 a share in earnings power and support a $70 stock.

Will Facebook be held to a higher standard, like Google, whose shares are down from their 2007 peak despite sharply higher profits and revenues as investors worry about growth prospects? Or will it be treated more like Amazon.com, which seems to get a pass, quarter after quarter, on producing sizable earnings as investor gush over its revenue growth and future opportunities? Facebook's future share price may depend exactly on that.

Better bets probably are Apple and Google, proven growth companies with much lower valuations and cash-laden balance sheets. Connect with your friends on Facebook. Stay away from the stock.

Facebook Versus Other Growth Stocks

If Facebook goes public this week at $35 a share, it would be valued at almost 70 times projected 2012 profits, a big premium to proven growth stocks Google and Apple.

Recent

2012 E

2012 E

Market

Net Cash

2012 E

Company/Ticker

Price

EPS

P/E

Val (bil)

(bil)

Rev (bil)

Facebook /FB*

$35 .00

$0.51

67

$95

$9.0

$5.2

Apple /AAPL

570.52

47.01

12

532

110.2

162.0

Google /GOOG

613.66

43.42

14

200

44.7

35.0

Amazon.com /AMZN

226.69

3.05

74

103

3.4

63.0

LinkedIn /LNKD

111.00

0.68

163

11

0.6

0.9

Groupon /GRPN

9.87

0.20

49

6

1.1

2.3

E=Estimate *Price at the high end of IPO range. AAPL has a Sept. fiscal year. GOOG and AMZN earnings exclude stock-based compensation expenses.